Equity portfolio diversification under time-varying predictability and comovements
Subtitle: evidence from Ireland, the US, and the UK
By: by Massimo Guidolin and Stuart Hyde.
Contributors: Hyde, Stuart.; Federal Reserve Bank of St. Louis.
Series: Working paper -- 2008-005A; Working paper (Federal Reserve Bank of St. Louis : Online) -- 2008-005A.
Publisher: Federal Reserve Bank of St. Louis
Published: 2008
Place of publication: [St. Louis, Mo.]
Language: eng
Format: Electronic resource
Description: "We use multivariate regime switching vector autoregressive models to characterize the time-varying linkages among short-term interest rates (monetary policy) and stock returns in the Irish, the US and UK markets.  We find that two regimes, characterized as bear and bull states, are required to characterize the dynamics of returns and short-term rates.  This implies that we cannot reject the hypothesis that the regimes driving the markets in the small open economy are largely synchronous with those typical of the major markets.  We compute time-varying Sharpe ratios and recursive mean-variance portfolio weights and document that a regime switching framework produces out-of-sample portfolio performance that outperforms simpler models that ignore regimes.  Interestingly, the portfolio shares derived under regime switching dynamics implies a fairly low committment to the Irish market, in spite of its brilliant unconditional risk-return trade-off"--Federal Reserve Bank of St. Louis web site.
Notes: Title from PDF file as viewed on 2/4/2008.

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